COVID-19 has caused major economic disruption and, of course, very regrettably, has led to many casualties.
Economic indicators have been showing unprecedented increases in countries’ deficits and GDP (gross domestic product, being such indicator defined, according to OCSE, the standard measure of the value added created through the production of goods and services in a country during a certain period) drops, due the combined effect of states’ measures focused on sustaining their productive economic systems, together with economic packages to help the laid off workers and the drastic raise in the unemployment.
A third dramatic factor is also represented by the consequences of the lockdown measures on business and of the changing in consumers’ habits forced by the pandemic and the aforesaid restrictive measures. A shrinking economy, decreasing the tax base, also causes the second-tier effect of draining fiscal resources already depauperated by the expansionary measures in place.
The combination of these factors inevitably led to a dramatic deterioration of the debt to GDP ratio of many countries. This simple indicator has indeed a great relevance in the economic ecosystem, since it provides a quick snapshot on each single country’s ability to repay its debt.
In this respect, using as economic reference the absolute size of a debt does not offer, in itself, an appropriate indicator to measure the creditworthiness and the repayment ability of a borrower, since these clearly depend on the ability to generate revenues and the income stream of such borrower: a debt of €1 million might be significant for a person earning €20,000 per year, but far less relevant for an individual earning few millions per year. The debt to GDP ratio translates complex absolute numbers into a relatively simple and standardised measures to interpret.
The debt to GDP ratios, which many countries are about to show during the course of 2020, are clearly the worst figures since World War II. The biggest economy of the planet, the US, will be part of this group.
However, the tragic impact of this ‘black swan’ on national budgets has been and shall be far worse for chronically sick economies, like Italy, whose debt to GDP is expected to get close to 160 per cent by the end of the year, skyrocketing from 134.8 per cent of 2019 and 2018. Clouds are even darker on smaller emerging economies where the IMF is already considering debt restructuring.
While policymakers have being trying to react fast to counterbalance economies’ drama, by combining aggressive expansionary monetary policies with large boosts in fiscal spending, tax incentives and other fiscal stimulus, the real hope to avoid that the situation gets out of hands, with a dramatic compression in citizens wealth, is that COVID-19 cures and vaccines will be ready soon and that the productive system will go back to the pre-pandemic period.
The biggest economic crisis since World War II requires some careful consideration, since the limbo of time to develop and make vaccines available to everyone is unknown and the depth of the crisis is getting multiplied by the fact that all the economies have been affected at the same time, damaging exports, FDIs and business at global level.
Dislocation in assets prices, starting from commodities, and an increase in nationalistic attitude at single states level, might further increase geopolitical risks and exacerbate the situation.
While hope is the last to die, especially the one of a V-shaped economy recovery, the drama of the situation should require very calibrated macroeconomic actions to drive the economies out of the storm. If the recovery letter would not be a V, the world should not be caught out of guard for the second time within a short period.
The main question is then where to direct the economic packages to revive the economy.
To answer this question, policymakers should clearly set their objectives: do they want the economy to go back to the past or should they consider what is best for the future? The question is whether to look backward or to have the courage to look forward.
COVID-19 should have already taught humankind a great lesson: the announced risk of a pandemic, probably caused by some human inadvertent and poorly- thought actions, caught our self-proclaimed advanced civilisation by surprise. Nature, the supposedly dominating force, represented well by the images of violated wild animals lying in remote markets, took its swift revenge on humans coincidentally and allegedly from those very animal species, delivering an infinite army of invisible viruses through the interconnected routes of our global economy.
Another far bigger, and well announced risk, is not that far away into the road of the humankind journey towards the next few decades. The risk, considered practically a scientific reality, is known as global warming and is caused by our economies violating nature at global level. If the COVID-19 drama could possibly have ever been a warning, it might be time to look ahead of us and drive our economy towards a path of long-term sustainability.
In the decision of economic allocation of the macroeconomic stimulus resources, it is unlikely that politicians will not be driven by short-term electoral considerations and pushed by specific stakeholders’ interest. If there is a time to keep the bar straight, this is when the storm can put in peril the full boat. Whoever is in charge should not listen to every voice of the crew but rather get everyone safe out of the storm.
The bitter pill of the COVID-19 crisis should be swallowed so the reforms and the capitals necessary for the economies to recover from the post lockdown situations, including eventual debt restructuring, should be immediately channelled towards concrete objectives to reshape our industries and economic systems to the zero emission target and circular economy, so well articulated by the European Green Deal and by the Paris Agreement.
Malta has a great chance to use its agility of fast regulatory innovations to promptly adopt organic measures favouring ESG friendly policies and aiming at a long-term sustainable economy.
If Malta would take this opportunity to lead the way, maybe after the clouds of the COVID-19 pandemic, there would be the prospective of a more shining future.
Simone Russo, co-founder and CEO of Amagis Capital
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